Scope of IFM – Investment, Financing & Dividend Decisions
The scope of IFM is much wider than domestic finance. It answers three critical questions for an MNC: Where to invest? Where to get money? How to distribute profit?
1. International Investment Decision
(Where to put money?)
- Foreign Direct Investment (FDI): Setting up a factory or buying a company abroad. Control is High.
- Portfolio Investment: Buying shares of a foreign company (e.g., Apple shares). Control is Low.
- Capital Budgeting: Assessing if a foreign project is viable using NPV (Net Present Value).
- Challenge: Estimating cash flows in foreign currency and adjusting for inflation differences.
2. International Financing Decision
(Where to get money?)
- Sourcing: Should we take a loan from an Indian Bank (Rate 10%) or a US Bank (Rate 4%)?
- Instruments:
- ADR/GDR: Listing shares on foreign stock exchanges.
- FCCB: Foreign Currency Convertible Bonds.
- Eurocurrency Market: Borrowing dollars kept in banks outside USA.
3. International Dividend Decision
(What to do with profit?)
- Repatriation: Sending profit back to the home country.
- Challenges:
- Withholding Tax: Foreign government takes a cut before money leaves.
- Blocked Funds: Some countries restrict moving money out.
4. Working Capital Management
- Managing current assets (Cash, Inventory, Receivables) across multiple countries.
- Netting: If Unit A owes Unit B $100 and Unit B owes Unit A $80, only transfer $20. Saves transaction fees.
5. Exam Notes: Writing the Answer
Question: "Explain the Scope of IFM." (10 Marks)
Answering Strategy: Draw a tree diagram with 3 branches:
- Investment: FDI vs Portfolio.
- Financing: Global sources (Eurobonds, ADRs).
- Dividend: Repatriation problems.
- Add a 4th point: Risk Management (Hedging using Forwards/Futures).
Summary
- Investment: Go where returns are highest.
- Financing: Go where cost of capital is lowest.
- Dividend: Go where tax impact is minimal.
Quiz Time! 🎯
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